COMBATING

FRAUD

IN PUBLIC PURCHASING

Antitrust Bureau

Prepared by Bob Hubbard James Yoon

Antitrust Bureau

Office of the Attorney General

State of New York

, 2

New York, NY 10

(212) 416-8262

Robert.Hubbard@James.Yoon@ag.ny.gov

COMBATING FRAUD IN PUBLIC PURCHASING

CONTENTS

Checklist for Collusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Price-fixing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Bid-rigging and Allocation of Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Group Boycotts-Refusals to Deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Tie-ins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Steps to Encourage Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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QUESTIONS TO ASK

WHEN REVIEWING BIDS

1. Does the successful bidder repeatedly subcontract work to companies that either

submitted higher bids on the same projects or contract pick up

bid package for the project or contract but did not submit a bid?

2. Did qualified bidders fail to bid?

Qualified bidders are those who either have the administrative and

professional capabilities to provide the supplies, or have the

financial capability of bidding the contract and whose geographical

location give serious consideration to the project.

3. Do certain contractors repeatedly bid against one another (may indicate

complementary bidding) or not bid against one another (may indicate market

allocation)?

4. Does a particular contractor always win in a given

geographical area?

ther local purchasing agents can help provide

this information. You can plot the results on acolor shaded map.

5. Does a particular contractor fail to cross a particular boundary line in

bidding when there is no physical or regulatory barrier ?

6. Are there contractors who bid frequently but fail to win? (Are these same

contractors involved in private work, or do they work to

provide supplies solely on governmental contracts?)

This could indicate that the contractor is making

by merely submitting complementary

bids .

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7. Are bid items in the contract identical?

This does not necessarily mean because suppliers often

quote the same prices to a number of bidders. It is a significant matter,however, when the identical bid involves a service or a service-product

item. The chances that two different contractors are charging the

identical amount for a particular service .

8. Have these contractors been convicted of bid-rigging in other states or

jurisdictions or are they now under investigation by another state or jurisdiction?

This does not necessarily mean they have rigged bids in

your jurisdiction. It is difficult for a contractor to turn

integrity on and off, however; therefore, extreme

suspicion should be the order of the day.

9. Did the contractors bid as a "joint venture" when either

contractor had the administrative, professional, and financial

capability of bidding the contract individually or as a prime

contractor?

10. Has the contractor in the past bid varying amounts for similar line items on

different projects but within the same geographical area?

Look for price variances that do not accord with the price index.

11. If the original bids are thrown out, do the same bidders either fail to rebid, or, if

they do rebid, are they in the same bid ranking on rebid?

Some investigations have turned up “gentlemen’s”

agreements that the low bidder will also prevail on

the second bidding, sometimes referred to as "the

code of the West.”

12. By plotting contracts on a graph over a fixed period of time, does there appear to

be a percentage balancing of the total contracts, total items, or total dollar volume

won by each of the contractors in a given geographical area?

13. Do the contractors in a given geographical area always fall within one or two

percentage points of the bid estimate?

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14. Have there been any new bidders bidding in the geographical area within the last

five years?

If there have not, then more profitable opportunities

for bid-rigging exist.

15. Does a successful bidder repeatedly use unsuccessful

bidders as subcontractors on the same contract?

This could be by arrangement.

16. Does the type used the contract appear the same?

Sometimes the contractor chosen by the conspiracy to be the successful bidderwill prepare all the bids.

17. When the successful bidder arrived with his bid, did he or she also present the

bids of other bidders?

18. Do the prices of contracts drop when a new

bidder bids comes into a given area?

This could indicate the new bidder is

not a part of an ongoing conspiracy and

the conspiracy had to "bid hard"

(submit an honest, competitive bid).

19. Have any government personnel noted prime contractors meeting together close to

the time of the bid opening?

This, of course, does not mean they were

violating the law, but it should put the

contracting officer on alert.

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20. Are all of the bidders real companies?

Bid riggers might use “fictitious bidders”

to comply with competitive bidding laws.

21. Do the people getting the work done understand and follow these rules?

Getting competitive pricing is hard work, and some employees benefit from active

supervision. In addition, unfortunately, on occasion, government employees have

become participants in criminal conspiracies in return for payoffs from the

conspirators.

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SUSPICIOUS STATEMENTS

MADE BY VENDORS

Sometimes, statements made by marketing representatives or

suppliers may suggest that price fixing is involved. Examples of such statements

that are suspicious and may indicate price fixing, include:

a. Any reference to "association price schedules," "industry price

schedules," "industry suggested prices," "industry-wide" or "market-

wide" pricing.

b. Justification for the price or terms offered "because they

follow industry (or industry leaders) pricing or terms," or

"follow (a named competitor's) pricing or terms."

c. Any reference to "industry self-regulation," etc., such as justification for

price or terms "because they conform to (or further) the industry's

guidelines" or "standards."

d. Any references that the representative's company has been meeting with

its competitors for whatever reason.

e. Justification for price or terms "because our suppliers, etc., require it" or

"because our competitors, etc., charge about the same," or "we all do it."

Statements by marketing representatives or in company

promotional materials may also suggest the existence of agreements

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among competitors to divide territories or customers. (This is also known as market

allocation and, like price-fixing, is per se illegal.) Highly suspicious examples are:

a. Any reference that the representative's company

"does not sell in that area," or that "only a particular

firm sells in that area," or "deals with that

business."

b. Statements to the effect that a particular

representative (of a competitor) should not be

making a particular proposal to you, or should not

be calling on you.

c. Statements to the effect that it is a particular vendor's "turn" to receive a

particular job or contract.

Communication among purchasing agents that

procure the same services or commodities can reveal whether

vendors are selling to some agencies but not to others, or if vendors appear

to be limiting their selling to particular or selective units within a given

agency. This is one of the most effective ways to monitor the procurement

process in your area. Regular communications are strongly encouraged.

Talking With Your Colleagues and

the Attorney General’s Office

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CHECKLIST FOR COLLUSION

Price-fixing: ___1. Identical bids were received from:

______________________________________

______________________________________

______________________________________

___2. A number of bids were submitted that were 15

percent or more higher than the published price

sheets, information, or previous bidding of those

bidders.

___3. Bid amounts may include resale price suppliers or

others "require" to be charged.

Bid-rigging and

Allocation of

Customers:

___4. Low bid is 15 percent more than

previous low bid for comparable

goods or services.

___5. The low bidder bid is 15 percent

higher or lower on a line item

than it was in the past.

___6. Unusually low percentage of potential bidders

actually bid.

___7. The low bidder continues to bid in only one

geographical area without any apparent reason.

___8. A contractor appears to be unwilling to cross a

particular geographical boundary line for no

apparent reason.

___9. Regular rotation or sharing of bids among potential

bidders occurs.

___10. The line items bid are identical among certain of

the bidders, particularly for service items.

___11. A number of potential bidders continue to pick up

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bid documents but fail to bid.

___12. There are contractors who regularly bid and do not

win or have failed to bid against one another.

___13. Two or more contractors bid on a joint venture

even though it is possible either could have bid

the contract alone.

___14. The original bids on the contract were rejected

and the contract was rebid; however, only one bid

was received on rebid. That bid was that of the

low bidder on the first advertisement.

___15. There have been no new bidders in a particular

geographical area although there

were other contractors with

potential to bid the area.

Group Boycotts-

Refusals to Deal:

___16. A bidder refused or may have

refused to deal with a

subcontractor who bid against him.

___17. A bidder required or may have required a

subcontractor to buy materials exclusively from

him.

___18. A bidder withdrew or may have withdrawn

because of a feared cut-off of supplies or credit

from other enterprises.

Tie-ins:___19. A bidder with important resources required or

may have required the purchase of other items as a

condition for doing the work.

___20. A bidder required or may have required

subcontractors to purchase additional items at

high cost as a condition for participating in the

project.

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STEPS TO ENCOURAGE COMPETITION

Purchasing officials can assist in the enforcement of antitrust

laws and get better value for the public not only by actively detecting

bid rigging but by taking positive steps to stimulate competition.

The key to detecting bidding irregularities is to be aware of the

circumstances surrounding your bids. One of the best ways to do this

is to constantly check with other procurement officials in your

geographical area and compare prices on various goods and services.

This data will allow you to make judgments about the prices and bids

you are getting from vendors.

A brief review of some procedures that can easily be implemented by local

officials is provided to assist in this process.

1. Insist on compliance with bidding procedures.

Review bids that you receive carefully to determine that all conditions imposed by

the State are met, proper bonds have been supplied, all non-collusion statements

are properly completed, and all required paperwor signed. Force the vendors

into providing carefully executed bids.

2. Expand your list of bidders.

An illegal collusive agreement is harder to reach, implement, and maintain with

each additional alternative bidder. To reduce the ability of vendors to collude,

solicit as many vendors from as many sources as you can.

3. Know who you are doing business with.

Check other agencies to determine whether a vendor is reliable, responsible, or has

been indicted or convicted of any related crimes. Consider instituting a

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questionnaire that forces vendors/contractors to supply you with information that

can be used to help determine bidder responsibility. As you should be aware, New

York does not have a debarment or suspension statute that allows us to totally

eliminate those vendors accused and/or convicted of bid rigging violations. A

review usually must be done on a case by case basis to determine vendor

"responsibility.” After a review, a vendor can be found "not responsible" and a bid

could be awarded to the next lowest bidder.

4. Prepare clear specifications.

Work hard on writing clear, concise specifications that guarantee that

you get the product that will perform the job without restricting the

alternatives unnecessarily. Specification writing is probably the single

most important step in the process.

Avoid limiting competitive alternatives in your specifications:

a) Do not tailor your specifications to one particular product or

supplier to force the outcome of a bid. With rare exception,

any bid that reads "no substitutes" is illegal and ill-advised.

b) Do not use specifications that are copied from manufacturer’s

literature.

c) Do not use brand names in specifications unless you are

demonstrating the characteristics of a product and then only if

you add "or equivalent" and are ready to accept any product

reasonably equivalent after fair examination.

5. Be careful of the certain techniques that we have seen in various parts of

the State during our investigations.

a) Do not use contract extensions to continue purchasing from a vendor after a

contract term expires unless it is a true emergency. Contract extension

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language must be included in the original contract and any price increase

should be pegged to the CPI or a show cause statement.

b) Do not award open-ended contracts with no estimate of usage or a time

frame for the life of the contract.

c) Do not break the value of a contract down into small amounts that fall

under the legal limits imposed by General Municipal Law (awarding a

series of $2,000 and $3,000 contracts within a year for the same or similar

products). Courts have ruled that similar products, purchased from the

same vendor, should constitute one contract.

d) Do not grant contracts without competitive bidding under the professional

services exemption, when the service does not fall into the generally

accepted definition provided for in the statute.

e) Do not allow school districts to purchase products from a town contract.

There is not provision in the law for this activity. Schools may purchase

off state contracts, county contracts, and regional BOCES contracts.

Do not , which may get them talking to each other and possibly lead to collusion